Q2 2022 ICON PLC Earnings Call

July 28, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Good day and thank you for standing by welcome to the second quarter of 'twenty to 'twenty two results conference call. At this time, all participants are in listen only mode.

After the speaker's presentation, there will be the question and answer session.

Ask a question during the session you will need to press star one on your telephone keypad. You will then hear an automated message advising Johan does right now.

Be advised that today's conference is being recorded I would now like to hand, the conference over to first speaker today Kate Haven. Please go ahead.

Thank you good day and thank you for joining us on this call covering the quarter ended June 30th 2022 also on the call today, we have our CEO , Dr. Steve Cutler and our CFO Mr. Brendan Brennan.

Like to note that this call's webcast and that there are slides available to download on our website to accompany today's call.

Certain statements in today's call will be forward looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions.

Actual results may differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business.

Listeners are cautioned that forward looking statements are not guarantees of future performance.

Forward looking statements are only as of the date. They are made and we do not undertake any obligation to update publicly any forward looking statements either as a result of new information future events or otherwise.

More information about the risks and uncertainties relating to these forward looking statements may be found in our SEC reports filed by the company, including the form 20-F filed on March one 2022.

This presentation includes selected non-GAAP financial measures.

Brendan will be referencing in their prepared remarks for our presentation of the most directly comparable GAAP financial measures. Please refer to the press release section titled condensed consolidated statements of operations.

While non-GAAP financial measures are not a superior to or a substitute for the comparable GAAP measures. We believe certain non-GAAP information is more useful to investors for historical comparison purposes.

Included in the press release and the earnings slides, you'll note a reconciliation of non-GAAP measures adjusted EBITDA excludes stock compensation expense restructuring costs.

Foreign currency gains and losses amortization and transaction related costs and their respective tax benefits.

We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related follow up question.

Now I'd like to hand over the call to our CFO , Mr. Brendan Brennan.

Thank you Jay.

Quarter, two Mike unchanged gross business wins of $2 $76 billion.

441 million more of a cancellation.

This resulted in net awards in the quarter, a $2 $2 billion of net book to Bill of one two.

On a trailing 12 month basis, our net book to Bill was 125.

With the addition of the New awards in quarter, two our backlog grew to a record $28 billion, representing an increase of two 1% on the quarter. One of 2022, an increase of 10, 7% year over year on a combined company basis.

Our backlog burn was nine 9% in the quarter consistent with boardwalk.

Revenue in quarter, two was one $935 million. This represents a year on year increase of 122, 1% or 129, 9% on a constant currency basis.

On a combined company basis revenue increased by <unk>, 9% or four 4% on a constant currency basis from the comparable period last year.

The revenue impact from year over year changes in foreign currency exchange rates resulted in a headwind of approximately $68 million in quarter two.

Our top 25 customer concentration decreased slightly from quarter, one as our top customer represented eight 7% of revenue.

Top five customers represented 27, 2% of revenue our top 10 represented 46%, while our top 25 represented 59, 7%.

Adjusted gross margin for the quarter was 28, 4% compared to 27, 8% in quarter one.

Gross margin increased sequentially due to increased operational efficiency and strong direct fee revenue growth.

Sure.

Total SG&A expense was $194 $4 million in quarter, two or 10% revenue.

We expect total SG&A expense to continue at a similar absolute dollar level as we progress through the second half of the year.

Adjusted EBITDA was $354 $3 million for the quarter or 18, 3% of revenue.

In the comparable period last year, adjusted EBITDA was $305 $1 million.

On a combined company basis, or 15, 9% of revenue representing a year on year increase of 16, 1%.

Adjusted operating income for quarter, two was $328 6 million a margin of 17%.

The adjusted net interest expense was $43 5 million.

For quarter two.

Due to the increasing interest rate environment expected through the duration of the year. We are now anticipating full year interest expense to total approximately $210 million.

This represents an increase of approximately $50 million from our initial assumptions for the full year interest expense when guidance was issued in January .

The adjusted effective tax rate was 17% for the quarter. We continued to expect the full year 2022, adjusted effective tax rate to be approximately 16, 5%.

Adjusted net income attributable to the group for the quarter was $235 8 million a margin of 12, 2% equating to diluted earnings per share of $2 86, an increase of 24, 4% year over year.

In the second quarter, the company recorded $8 $9 million of transaction and integration related costs U S. GAAP income from operations amounted to 177 8 million or nine 2% of revenue during the quarter to U S. GAAP net income attributable to the group in the quarter two was $115 7 million.

Or $1 41 per diluted share.

<unk> to $1 38.

For sure for the equivalent prior year periods.

Net accounts receivable.

$875 million of it starting to June 2022. This compares with a net accounts receivable balance of $745 million sorry, one March 'twenty two.

Cash collection efforts continued to be strong with Dsos of 41 days in the quarter down from 43 days on a comparable basis from June 30 of 2021 and up from 35 days on a comparable basis at March 31st 2002.

Cash generated from operating activities for the quarter was $182 million.

At June 30 of 2022, the company had a cash balance of $614 9 million and debt of $5 billion 046.

Leaving a net debt position of $4.429 billion.

This compared to net debt of 4 billion 500 581 million at March 31, 2000 beds to a net cash of $707 attributed at June <unk> 2021.

Capital expenditure during the quarter was $28 2 million.

We ended the quarter with a net debt to trailing 12 months adjusted EBITDA ratio of three one times from a capital deployment perspective, our priority remains our debt pay down in the near term and as such in quarter. Two we made a payment of $100 million on our term loan b facility, bringing our total repayments to 400 million.

Year to date.

Given our continued strong cash flow generation, we remain well on track to exit 2000 choice to below three turns of net debt to adjusted EBITDA.

We are evaluating our capital structure to determine if a more optimal mix can be attained.

You have made any changes to our current structure, but we will continue to actively evaluate potential options through the course of Q3.

All of that said I would now like to hand, the call over to Steve.

Thank you Brendan and good day everyone.

<unk> delivered strong results in quarter, two while continuing to manage through a number of global macroeconomic factors that are currently impacting our business.

The ongoing war in Ukraine continues to present operational challenges as we focus on supporting our employees customers and patients in the affected countries.

Our priorities remain on ensuring the safety of our employees as well as continuity for our customers programs.

The effective monitoring of patients on that trial.

During the quarter, we saw a step up of the impacts to our business in both countries.

At this time and for the foreseeable future we are not recruiting any new patients all starting any new studies in Russia all of that you're right.

But we are continuing to support in flight trial in both countries wherever possible.

Additionally, COVID-19 continues to have an impact on the business.

The number of sites restricted in some capacity was approximately 15% at the end of the second quarter as new variance spread.

Most significantly the mandated lockdowns in China, which were in place for most of the quarter too.

Rented challenges to saw an excess staffing and also to our laboratory operations in the country.

We now expect our full year revenue impact from the war in Ukraine, and Covid related Lockdowns in China to be approximately $60 million to $80 million.

In addition to the conflict in Europe , and China, Lockdowns, the strengthening U S dollar and rising interest rate environment provided further macroeconomic challenges during the quarter, which will impact our results for full year 2022.

Despite these current challenges the underlying demand conditions and clinical development remains solid.

In the past month, we have seen more deliberate spending from select customers in the emerging biotech segment as they look to prioritize due to public market funding challenges.

Given the more challenging macro environment for emerging Biopharma companies, we see an opportunity to further penetrate this segment as companies seek additional strategic input and the most efficient clinical trial plans to maximize the clinical development budget.

We also remain vigilant on one of our customers we are working with.

And continue to perform consistent due diligence on their ability to fund Charles before the contracting phase.

As a result, we are pleased to report that we have not seen any unusual cancellation activity in our backlog or with ongoing trials.

We believe the fundamentals of our industry are well intact anchored by large and midsized biopharma companies continuing to grow their R&D spend in line with historic market rates.

On a trailing 12 month basis total RFP value was up mid single digits in line with broader market growth.

In addition, we see good evidence of venture capital and private funding supporting small biopharma companies that are developing drugs and devices on the basis of good signs.

We remain confident in our ability to continue to meet our financial outlook as our business development continued to deliver against our goals of a one two to one three book to Bill and backlog growth accelerated to an impressive 10, 7% year over year on a combined company basis.

Our customer mix remains well balanced and consistent with prior periods with approximately 50% of our revenue and large biopharma and approximately 45% of our revenue and small and mid sized companies.

Approximately 15% of total company revenue and backlog is derived from the emerging biotech companies, which we define as those with less with $100 million of annual R&D spend.

Additionally, we are encouraged by the number of strategic partnership opportunities that are currently in our pipeline as large and midsized biopharma, including full service functional and hybrid models in development.

The clear benefits of our scale depth and breadth of service offerings and expertise as well as differentiated technologies and analytics are resonating well with new and existing customers.

<unk> investment in <unk>.

Areas, such as advanced analytics as well as decentralized clinical trial technology and services are delivered innovative solutions that are enabling studies of the future.

In the quarter, we completed a new release of the icon digital platform our purpose built platform.

Specifically designed for decentralized clinical trials.

This latest release included enhanced features on electronic clinical outcome assessments and electronic consent functionalities.

We continue to integrate our related clinical services and technologies Firecrest <unk> sites home health services might be assistance and others to further support harmonize integration of all patient data and services in a customized and flexible manner.

This way, we will provide a compelling solution that will enable us to provide a more efficient and faster clinical trial service to our customers.

Turning to our financial results performance was very good in the second quarter, resulting in combined company revenue growth of approximately 1% or four 4% on a constant currency basis year over year.

Excluding COVID-19 revenue growth was approximately 16% year over year on the same basis.

Operational performance was particularly strong in the quarter was 16% adjusted EBITDA growth year over year on a combined company basis, driven by strong direct fee revenue growth as well as efficient Resourcing and continued SG&A cost management.

In addition earnings per share grew an impressive 24% year over year.

We are updating our full year 2022 financial guidance to reflect the impacts of macroeconomic factors on our expected results.

The company now expects revenue to be in the range of 7000 $690 million to 7000 $810 million, an increase of 43% to 42, 5% year over year or three one to four 7% on a combined company basis.

This updated revenue range assumes foreign exchange rates at current spot rates for the second half of 2022 and.

And reflects an anticipated incremental negative headwind of approximately $120 million to $140 million on revenue since our earnings call in April as.

As well as an additional impact from the combination of the ongoing more with Ukraine.

Covid related Lockdowns in China.

The combination of our direct fee revenue growth and realized cost synergies is it driving accelerated margin expansion, which is expected to result in an adjusted EBITDA margin of approximately 19% for the full year.

100 basis points above our previous expectation.

Further we are narrowing our full year earnings per share guidance to a range of $11 65.

To $11 85.

The remaining at the same midpoint as our previous earnings per share range.

We continued our capital deployment strategy as expected by Nike.

$100 million payment on our term loan b facility in the quarter further reducing our leverage to three one times net debt to adjusted EBITDA.

The quarter down from three three times at the end of quarter one.

We believe we are on track to hit our aspirational target of exiting 2022 with a leverage ratio of approximately two five times adjusted EBITDA.

Earlier this month icon passed another milestone in our transformation will union with PRA Health Sciences by celebrating the one year anniversary of the launch of new iPhone.

We have made significant progress in our integration over the past year at a high.

Highly effective team has met the challenge of bringing together two large organizations all while continuing to focus on operational execution and project delivery for our customers.

The response to new art gun has continued to be very positive from our customers as evidenced by the number of new and expanded customer relationships that have been formed over the past year.

I'm, particularly proud to note that this integration has progressed with excellent customer retention, a testament to icons organizational commitment and execution and minimizing disruption for our customers.

There have been numerous achievements from our team over the past year as we continue on our journey to become the worlds, leading healthcare intelligence organization.

One of our priorities at the outset was to enable a shared employee experience through app icon and we are well on our way to achieving this through the rollout of key systems and platforms as well as in areas such as benefits harmonization and career development training programs.

As of the end of quarter. Two we have completed 60 facility integrations will closures over the past year, reducing costs optimizing our office footprint and bringing our staff together to allow for increased collaboration and engaged.

We have an ambitious goal to be the recognized employer of choice in the industry focusing on career development and growth opportunities for our employees.

We believe we are seeing results of our targeted investments in areas such as talent acquisition diversity inclusion and retention programs that are translating to reduce attrition and stabilizing turnover levels throughout the first half.

Due to the accelerated progress on integration efforts, we now expect to realize $100 million in cost synergies.

Thousand 22, an increase of $25 million over our previous target for the full year.

Our target for total cost synergies and revenue synergies of $150 million and $100 million respectively remain in place as we continue to focus our efforts to implement a global business services model and drive further success in cross sell opportunities.

With the acceleration of expected realized cost synergies in 2022, we now anticipate achieving a $150 million cost synergy target exiting 2023.

12 months ahead.

Our previous guidance.

IPhone has made great strides over the past year as we doubled the scale of our organization, while continuing to deliver best in class performance to our customers.

With the ever changing macro environment and growing complexity of clinical trial, we recognize the need for continued innovation and the importance of integrated and flexible solutions to meet customers evolving needs. We.

We remain committed to investing further in the critical data technology and talent to further enhance our service offering.

Before moving to Q&A I would like to take a moment to thank our dedicated employees for their ongoing commitment to our company customers and patients and to recognize the significant efforts over the past quarter and driving the success of New York.

Operator, we are now ready for questions.

<unk>.

Yes.

Thank you.

As a reminder to ask a question you do need to press star one.

One one on your telephone lake for name to be announced.

Bob will will compile the Q&A roster.

Take a few moments.

Okay.

And now we're going to take our first question.

The first question comes from the line of a little bit to understand from Evercore ISI. Your line is open. Please ask your question.

Hi, guys. Thanks, so much for the question.

Wondering two things one can you talk about sort of you know.

A little bit more in detail the tariff RFP in win rate by sort of customer types in the quarter I know you alluded to some potential.

Changes in sort of.

Hey, guys.

I first heard about in biotech.

<unk> got in terms of funding.

And then can you also talk about.

I think you said that there was nothing unusual in the cancellations, but on a relevant looks like that ticked up a little bit in the quarter and I don't know if there was like a specific program that perhaps didn't go or.

Something else you can provide in terms of that so we can sort of think about the run rate going forward.

Sure Let me take the first one let's start with the second one first in terms of cancellations that did tick up slightly but it was really around the down scoping of a couple of significant vaccine studies that we were working with them in fact, starting to work on all pulling forward.

Wasn't there wasn't anything that completely canceled just these vaccine studies are large and they are.

Somewhat.

Changeable as they get planned so we had a couple that have gone into the backlog within actually came out because they go down.

Fuel prices there is still moving forward.

At a reduced scope that was the major sort.

A particular driver for the uptick on the canceled license auditing, so really nothing nothing there that we sort of material in terms of taking stuff out in terms of the RFP I think we are going to be a little careful about rfps, we do see them as somewhat directionally.

Correlated with longer term business performance, but really I think when you look at quarterly numbers. They can vary quite significantly and it can be quite volatile and you get a particular large ballpark into a quarter, which can which can skew the numbers quite a lot.

I just I just want to be a little careful with when we start quoting.

On the RFP doesn't fit.

On a trailing 12 month I think trailing 12 months is probably the best way to look at these sort of things we're up about mid single digits for us.

If you take Covid out.

Pretty flat in terms of the segments and we're certainly seeing a lot of positive move forward in that large pharma midsize, the biotechs, where a little a little bit more attenuated a little bit down year on year, but really overall, we see a pretty solid and positive business environment and to the side of the RFP do you have to be a little careful and you have wins.

Losses, and you have.

You have sort of cancellations within the Rfps are.

Sort of a mid teens I suppose proportional percentage of Rfps that actually don't get to any decision.

You do have to be a little careful I think about how you interpret.

The data in this industry.

Okay Super helpful and maybe one just quick fashion, one im sorry, if I missed it did you give the cross sell number in the quarter.

No we didnt give the cross sell number in the quarter.

We weren't specific on that.

Would you like to.

I'm not sure if I have that we haven't.

We're not far off.

Mutation.

I think overall I think to date, we're at about $100 million.

In cross sell up.

Some of the closed.

That's pretty much in line with what we expected to do so we're on track with those with the cross sale. The revenue types of course, a little bit longer to flow through on those cross sales, but on.

In terms of size in terms of year to date, we're on track.

Okay perfect. Thank you so much guys.

Thank you Elizabeth.

Now we're going to take over next question.

Please standby.

The next question comes from the line of Christian <unk> from William Blair. Your line is open. Please ask your question.

Hey, good morning, and thanks for the question you made the comment that you're trying to become more penetrated in small biotech you're at 15% now, but what is your ideal mix here and how does your strategy change when you're targeting the smaller customers and what solutions are resonating with that thanks.

A lot of questions there because that.

Let's be clear.

The biotech it's about 30% of our business is in the biotech small biotech.

The capital markets, what we call the Caf week define them as those companies that spend a 100 million or less annually in R&D, that's about 15%.

About of our revenue so just to clarify a little bit.

Terms of the where our businesses.

Third in biotech, including those little ones and then there's mid size and about half of that business is in large pharma.

To answer your question in terms of getting more penetrated we do see opportunities in that in that but there are a lot of companies in there.

And they have there is some many of them are doing very good science and so we have some real opportunities and as we move forward with them.

I've indicated we vet them very carefully in terms of what we do and how we contract with them.

We have that ability to do that and we are finding that we have a strong opportunity to help them develop their drugs and devices in a way that is perhaps a bit more efficient than maybe they would have done it.

Left on their own or working with somebody else. We have a strong drug development group. We can put together a plan that essentially spent their money more effectively that's the way we'd like to look at it.

The registration programs plans that clinical development plan and runs the studies more effectively and more efficiently.

The opportunity, we see as we see companies wanting to spend their money more deliberately and more effectively in the space.

Great. Thank you.

Thank you.

Now we're going to take over next question.

Please standby.

And our next question comes from the line of Patrick Donnelly from Citi. Your line is open. Please ask your question.

Hey, guys. Thanks for taking the questions maybe just one on the setup I mean, you guys have talked about the backdrop generally being pretty solid maybe a little bit on the biotech side I know intra quarter, you talked a little bit about the 23 set of kind of saying funding remains muted potentially in a scenario next year is maybe a little more mid singles.

Versus high single can you just talk about I guess, what Youre seeing currently what plays into what that scenario could look like into next year on the growth side.

On the growth for icon, Patrick you're looking for.

Yes, absolutely yes, okay.

We are at the moment withstanding behind our.

Plan for the <unk>.

7% to 9% on a longer term basis, we have a plan to get to 10 billion by 2024, and so we don't see anything in the current environment that would stop us moving in that direction and going that we've talked about high single digits as we get into the back of back end of this year and that's the sort of number we should be thinking about it we are thinking about it.

We go through in the next couple of years.

<unk> environment, there's a lot of talk about it and clearly it's attenuated.

Come down over the last few quarters, but if you look at the absolute levels. They are still in the.

The historical norm basis, it's still in a pretty good place, you're probably going to go back 345 years to be there.

<unk> had an extraordinary period really over the last few years, but really.

If you look at it on an average basis over the last 10 or 15.

The amount of money that's out there is still it is still very solid and so we see plenty of opportunity in that space and we're still seeing.

Rfps and opportunities and engaging with customers we had.

Customer recently, just yesterday, who had raised well over $100 million.

Prostate Q3 to three of the phase III, which we were helping them with so there is money out there for good science and we.

We feel that we can we can help our customers drive that and that can continue to fuel, obviously outgrowth expectations, which remain as we've as we've outlined previously.

That's helpful and then Brendan maybe one for you just on kind of the margin guidance and then the synergies as well.

Obviously, the incremental jump up a bit in the second half here can you just talk about I guess the confidence level as you work your way through this year in terms of kind of maintaining that earnings guide obviously, the synergy pull forward helps a bit and then on the synergies it doesn't seem like a true cost pull forward given that obviously next year, you're kind of increasing the numbers as well. So you guys talked about whats.

Trending better there and how youre able to kind of deliver the savings this year and then obviously next year as well.

Sure Yeah, no I think in the second half yes.

As Steve mentioned in his comments, we're very pleased with our margin progression even in Q2 and I think we're set up well for our margin progression as we get into Q3 Q4, we need to continue to execute to our plan obviously.

We need to continue to be efficient as an organization. We've got a big plan around our synergies as we've spoken about before and I'll come back to that in a moment.

Certainly we need to continue to execute on that but as you saw with the 75 additional on the.

The realized in 'twenty two up from 75 in Q1, we do feel like we're moving at a good pace through that that should that ambition of getting to the $150. So we think given our strong and solid there, particularly I am very happy with the gross margin profile in the current quarter.

And again that comes from a good mix of very good solid underlying business from a direct fee perspective, a good efficient use of our projects and our staff as we got through the second quarter as well so.

The pipeline remains good and solid we're working on more business that we'll be able to continue to deliver to that kind of margin profile in the second half of the year and as I said, we've got good visibility on our synergies I think on the synergy specifically that's going back to that.

I think we're pretty good cost managers as you guys know from for many years of interaction.

We were always going to look to drive harder on our on the timing certainly of our synergies and are very pleased that we've now realized and will realize $100 million and we feel we have good visibility to that during the course of 'twenty two.

And then obviously, we've got the external.

Its target of $150 million, there and we feel that we will be able to totally add implement that so that we are in good Nick to deliver those kind of savings from 24 onwards. So yes, we're making good progress there.

We've been running ahead of the curve obviously on this one work twice continues to do that but right now we're happy with the progress we've made and if we feel like we're in a better position that as we go on through the course of the year of course, we will update you guys as we go through that.

Helpful. Thank you.

Thank you.

Now we're going to take over next question. Please.

Please standby.

And the next question comes from the line of tend to drop off from Guggenheim. Your line is open. Please ask your question.

Thanks very much.

I can maybe sneak in two just housekeeping and then one sort of bigger picture.

On the housekeeping just to make sure I have it correctly Brendan.

It sounds like the total FX headwind is now $2 two to two 4% that's assuming it was 1% before and is now 120 to $1 40, and then the other housekeeping, yes, I want to make sure the $60 million to $80 million incremental revenue headwind.

China, and Russia, Ukraine, or just one of those are just trying to make sure I get that and then the strategic question for probably Steve.

On the strategic opportunities that are coming up in the pipeline.

Is there is that a notable increase compared to the passes or different things driving it.

Yes.

People looking to replace other vendors built strategic for the first time, just any additional commentary there would be great and thanks for letting me sneak a nice questions.

I'll take the housekeeping one for Sandy I think the best way to maybe think about this is that.

We moved the midpoint of our guidance by about $160 million that you'd be able to quickly identify once you've had a chance of the math.

We said obviously on the call are 120 to 140 of that.

<unk> is a foreign exchange headwind I think that those tie in more or less to the numbers you're talking about there in percentage terms.

Obviously, the remainder of the 160, then is in relation to the other kind of macroeconomic environment.

Environment issues that we talked about which is a mix of Ukraine, Russia, and China, and albeit we called out the fact that.

Russia, Ukraine on its own would probably be a bigger quantum and I think Steve mentioned up to $80 million. So again, you can see the fact that we're talking about as still continuing to offset some of that headwind in our numbers. So I think that probably gives you a kind of an idea of what the component parts are there.

And in terms of the strategic questions that is the.

The opportunity is really fall into a number of different buckets in some cases, we are in discussions of adding on.

Two.

Customer in some cases, it's replacing.

Others, it's expanding.

Or there's a refresh happening in <unk>.

That's because these things tend to come up every three to four years and we now are very much a player in that market and so we've been able to come into those discussions led perhaps in the past.

As either individual organizations that wouldn't have been the case.

They don't just happening in the large pharma space, although that tends to be the predominant it's in some of the mid pharma space as well and the fact that we have both functional and full service capabilities and of course <unk> is also very important because there are a number of customers who want to talk to us about the sort of hybrid model some functional areas.

But.

Our full service components. So we feel we're well positioned from a service offering point of view to be a part of these strategic discussions with a strategic partnerships.

Pleased with with I guess, they don't take a little bit of time to come onboard.

Even though that yourself, but we do feel we're in a good place with a number of these discussions with a view to longer term growth for our company.

Great. Thanks.

Thank you.

Now we're going to take over next question. Please standby.

And the next question comes from the line of Eric Coldwell from Baird.

Your line is open please ask a question.

Thanks, and good morning, I wanted to hit on the margin.

Expansion improvement Varian.

Very impressive.

Obviously, you do have some cost actions in PRA synergies, but.

It sounds like there is also maybe a acceleration in service revenue above what you, possibly anticipated in the past.

And you mentioned, the cancellations, which were actually below my model, but maybe ticked up a little versus the recent average you said those were related to Covid vaccine studies I'm wondering if some of that might have been pass through revenues such that just the optics on the margin are benefiting from lower pass throughs, then perhaps you anticipated to start the year.

I'll start with that question and I have one more follow up thanks.

Yes, Eric it's Brendan here I might give a crack at that and Youre quite right actually on your on your although it's not a COVID-19 vaccine. It's a vaccine study, but its a down scope. So youre right on vaccine studies. There is always the biggest pass through element and as you know, we always talk of our business wins in our revenue inclusive of posture. So there absolutely is.

And uptick there that probably plays against us a little bit in the quarter.

From the from the calculation quantum perspective, that's quite quite correct, we've been really happy with.

We call that out on the call in terms of our direct fee revenue growth.

Ex COVID-19.

On a constant currency basis, 16% up year over year.

<unk>.

On a 606 basis, yet just to clarify that point as a case case give me the interior to make sure I thought about it.

So.

That's been strong strong performance and it comes back to I suppose the dilemma, we have been talking about over the course of this year and that is that we came into the year with good visibility you have nice strong at.

As our mix our business in terms of our non COVID-19 business and so thats been playing through well and obviously that step down in the proportional margin I should say.

As proportional pass through is very positive from a margin expansion perspective, as we go through the course of the year. So I think it's in line, probably with our expectations and to this point.

As I said very pleased with gross margin made a commentary around so we are seeing good utilization of our business. So I suppose it's a couple of things its strong revenue as anticipated with a better mix covert non COVID-19.

Then really really good operational delivery from an efficiency of head count perspective.

Utilization of that head count as we went through the first half of the year. So yes, I wouldn't say we were out of line with our expectations at this stage, but certainly happy with where we are progressing.

Okay, Great and then on my on my other question. It's about hiring you have accelerated your head. Count addition, net head Count addition, again this quarter a very big number.

Can you talk a little bit about the labor environment the recruiting situation.

Turnover, just just a broad stroke on what youre seeing on the.

Human capital side of the business, thanks very much.

Sure Eric Steve maybe I'll take I'll take that one so suddenly we have we continue to hire.

Pretty aggressively we have more work to do.

We're bringing people in.

Pretty pretty rapid rate.

In terms of the labor market itself, it's challenging.

Certainly some.

Yes.

The costs of bringing people in.

Significantly more significantly.

A year or two ago, but it's but it's not crazy and then certainly I think we've seen perhaps over the last month or two even in relatively short period, but some attenuation of that.

The labor market seems to be modeled modem buying a little bit and I think were seem to be we certainly able to meet our goals in terms of recruitment in the cost of those is that recruitment.

It's a little early by the impression is that it's.

Becoming easier in other words is the cost.

Skyrocketing, perhaps as much as they would say 12 months ago. So I think from that point of view our recruitment is in good shape, our retention certainly improved over the last quarter or so we've moved that up.

Several 100 bps, if thats, the right way to put it well over 80% of presenting.

Presenting that in and making good progress on a month by month quarter by quarter basis, again doing a number of things in terms of training programs development opportunities for people.

Making sure we have retention programs in place, but we feel the labor market is.

As a site.

Modifying a little bit in the positive direction for US. We're also able to you I'm sure you're interested in from a margin perspective, the pricing negotiations with customers have been constructive I would say.

Probably more constructive than any time I've seen in the industry over the last whatever it is 25 years.

And they really do understand that.

It's in our best interest to be able to pay people market salaries into time critical so.

Our customers are on board with that and that helped out the partnership angles that we have with our customers really help help those sort of discussions we can have very honest discussions we get independent surveys. We have good data now available on what those salaries are and that does help us to have those pricing discussions with customers. So the all in all I would say the logo market is.

Is improving.

Overall, whether it be from a recruitment.

Lower retention.

Yeah.

Thank you very much.

Thank you.

Now we're going to take our next question.

Please standby.

The next question comes from the line of Casey Woodring from Jpmorgan. Your line is open. Please ask your question.

Hi, guys. Thanks for the question.

So just can you comment on the DSO in the quarter. It looks like it's increased 17% sequentially to 41 I noticed that there was no really a reiteration of the prior DSO guide for the full year, which had been 25% to 35 days. So I'm. Just wondering if you have any updated expectations, there and if theres any concern around cash balances on the smid side, that's driving that number up.

Okay.

I'll take that one spread in there.

Yes no.

It did go Arizona a bit during the course of the quarter, we certainly want to see it back below 40, as we think about the back end of the year and into Q4.

We are doing a lot of change management in our finance organization at the moment side Thats boat in terms of location of heads, but also the systems that we're using so.

There was a lot of focus on that so there is that.

The upshot of that is a little bit of a lack of focus on DSO and we need to write that quite frankly in the second half of the year. It doesn't give me a great pause for thought there was nothing in our customer base that worries me from a aging perspective, our debtor book.

Or any other elements I don't think there was any particular cohorts of our debtors that were.

More trouble than anywhere else. So it's still a very very solid.

Cash collections profile wouldn't wouldn't revise any of that so we expect that as we go through the course of the year and again I expect that to flow into cash nicely, we always see a bit of a dip in our second quarter in terms of cash from operations, but I would expect that to pick up again in Q3 and Q4 so no.

A little bit more work to be done certainly a lot of a lot of spending here in the finance organization at the moment, we're making good progress generally speak and we would like to see this come back onto 40 by the time, we get to the end of the year.

Got it that's helpful and then.

Then just on the smid cap.

RFP flow you said it was down a bit year on year, one of your smaller peers. The other day talked about how its RFP program smid biotech maybe artificially inflated.

During this time just as.

A lot of these customers are fishing for price between sorrow. So do you believe this is true for your smid cap customer base in that.

That kind of RFP flow you called out maybe a little.

Higher than normal given.

Some of the.

Those dynamics thank you.

If you went on we're not seeing that.

I indicated with the Rfps, we get in there are basically three category you win some you lose some and some get canceled.

I don't see in other words, the ones that get canceled tend to be the ones that have been submitted.

Pricing discussions or at least some sort of pricing indications I never had really any intention of outflows and that number hasnt gone up that's and as I said, it's in the mid teens can.

<unk> fairly consistently across the business, we haven't seen that go up over the last quarter on auto I don't believe that.

Our biotech customers.

The floating throughout.

Throwing stuff out there thats not valid in general 85% of it.

The other moves towards an award.

Others are successful award or an unsuccessful.

But I don't see any any evidence of.

Then just putting stuff out there for the site.

Thank you you may just confirm have you finished with your question.

Yes that was great. Thank you.

Thank you.

Now we're going to take over next question.

Please standby.

The next question comes from the line of Justin <unk> from Deutsche Bank. Your line is open. Please ask your question.

Hi, good afternoon, everyone.

Just following up on kind of the backlog and awards.

Yes.

Sure Ben.

Any shift in kind of what.

What customers are seeking the type of solutions.

Over the last couple of quarters, whether it's full service FSP mix more DCP et cetera.

And can you help us think through how.

In the context of full service clinical if something were to enter.

The backlog now.

When when that would actually start to burn.

And show up.

And revenue.

Okay.

So Justin.

To answer the first parties question shift in terms of solutions I mean, we're certainly seeing an increased demand for these more decentralized to centralized components within our clinical trials. So we feel we're in a good place as we develop our decentralized platform.

And the services around that decentralized platform.

To provide.

If not the whole solution.

Still not very many fully decentralized trials, but we do have all of the components. So I think thats, probably a shift that's happened really as we come out of the pandemic a more risk based monitoring approach seems to be more in play.

Healthcare services being in demand silica sites with moving on with.

The color the consent sort of areas. So so.

So that would be I would say a trend in terms of FSP versus full service I don't think we see any particular move either either way as I mentioned in terms of our partnership discussions many of the companies who are looking to partner with us want to have the option of a functional service provider as well as a full service providers some of them.

Part of that portfolio. They may do full service other parts of their portfolio that they function. They want to have in house or they want to have a functional sort of obviously your provider together.

We're able to provide both of those sort of areas of the business.

Thank very positive for us and puts us in a good position around.

Those partnership discussions.

In terms of backlog and burn the timing in terms of that can vary if you get a rescue project. It could be you get a Friday and you start Monday.

On the other hand things, we don't put pretty careful that what goes into it back, but we don't put projects into our backlog that have a first patient in beyond I think it's about nine to 12 months.

And we also don't put it in and if there is a go no go decision to be made in a program. We said what goes into our backlog is it fairly conservatively managed I would say to.

To give you some sort of indication of I would say on average it's probably three to six months from award to start work.

So that it can be a little faster than that at times. It can be a little longer than that at times, but I would say that that's the sort of ballpark.

Yes.

Thank you that's helpful and then just.

One follow up on that it sounds like you.

Youre expecting growth ex COVID-19 to accelerate.

Over the next.

A few quarters and how much of the backlog still has COVID-19.

Welcome.

Yeah.

We expect October revenues to be around about the 5%, maybe a little less than the second half of the year. So.

There is still some work in there.

No question about that in the backlog in terms of acceleration I think 16% is a pretty good rate growth ex COVID-19.

<unk>.

I'm not sure I can get a sense to sit here and tell you that we're going to be growing faster than 16%.

That's the number that we've been able to get through excluding COVID-19.

Constant currency basis.

So I'm not sure I see a path so far from that but we certainly see.

Our non COVID-19 revenue continuing to grow and we certainly see it as we've already said continuing to provide us with opportunities for continued to improve our margins.

And then just on the percentage of Covid work in backlog. It is similar to that that level that you've quoted around that percentage of revenue that we expect which is in and around 5%.

So that's the expectation as we go through that.

The second part of the year and then just as a reminder, that Q2 last year was certainly our highest.

Tonnage or revenue in terms of Covid work last year.

<unk>.

Yes.

Yes, I appreciate all the questions. Thank you.

Thank you.

Now we are going to take over next question.

Please standby and the next question comes from the line of David Windley from Jefferies. Your line is open. Please ask your question.

Hi, good morning, and good afternoon, and thank you for taking my question.

I wanted to do.

Drill in a little bit on the emphasis on direct fee growth make sure I kind of understand but it seems to both incorporate <unk>.

Parts of what Eric asked in the change and maybe down scoping of.

Pass through elements that would then.

Honestly shift mix toward direct fee, but then you also are talking about DCT elements.

Kind of highlighted and what's what solutions are being demanded.

I just wanted to better understand how.

The mix of <unk>.

Demand of backlog bookings are coming through as it relates to.

Direct fee versus past.

Pass through and how that's evolving and if you feel like you are.

You are kind of forward expectations of that mix are appropriately.

Net.

Thanks.

Yes.

Might take a crack at this one its brendan here I suppose really what that that makes sense I wouldn't like to think we were downplaying posture. Obviously pass through is a big element of our revenue. It will continue to be it feels obviously, we've come through a very extraordinary period, where in the first half of last year was completely outsized I think what the way that the way to think about it though is.

Is that we are definitely coming back to a period now where posture represent no more or less that it did before COVID-19.

We're probably back to that proportionality of both business wins and revenue as we go we go forward Kate made the point were about 5% of backlog on those big Cola trials vaccine mix is an element of that but obviously, we're not seeing the same kind of super sized studies.

Outside studies, if you like we saw during the Covid era. So that's certainly something to bear in mind, but of course the mix of revenue is important and that the margin profile is changing quite a bit from a from a margin perspective, but it's because we're seeing that that cohort bolt is really no lag out of the numbers.

Are you, saying that that margin profile move up but as I said, the the posture elements will probably be where they were back in 2019, as we think about the back half of the year.

I think.

Just to add to your second part of the question around DCC and different different risk, but I think that will fuel our margins, but I do think that's more in the longer term and I think.

I wouldn't want to sit here and tell you that that's.

A real source of driving the margin in the relatively short term that's more of a longer term play.

Okay.

<unk>.

On the Brendan on the SG&A comments through the second half of the year, you said kind of dollars remaining relatively constant.

In a positive way coming back to your own.

Old ways.

I'm wondering with a $50 million.

Kind of an incremental synergy realization in 2003.

Yes, continuing on back to the old ways, if I can if that kind of stability in dollars of SG&A can continue beyond <unk>.

'twenty two it looks like that could or maybe the $50 million doesn't completely manifest in the SG&A line, but I'm just I'm just curious about.

How you might continue to scale the SG&A ratio as you did through the middle 2000 teams.

Yes, I mean like.

We undertake every every every tiger will become the floor, where everything will become the floor. So as we get to our target.

We are a conservative bunch, we don't generally talk about targets. We don't think that we can hit them. We also don't talk about the next target before we did the first one so I do think it's fair to say we have good visibility to that I think that will continue our ability to signal a significant leverage on our SG&A base as we go through 'twenty, three and yes, I think it's probably.

And our ambition to continue to leverage that SG&A and even as I said it back when we talked about in <unk> and in February when we were on our analyst day, we talked about the path to 21%, we do see a big chunk of that coming from continued SG&A leverage and that probably means going down too in the ballpark of 9% to 8% on SG&A over time.

So I think that certainly within our ambition uncertainty within our scope of how we're taking about our SG&A will not deliver absolute dollar for dollar flat into 'twenty three 'twenty four I think that's one we'll have to wait and see Dave at this point.

But sir.

We do have a lot of ambition about continued leverage.

Got it if I can ask just one more Steve I appreciate your comments on <unk>.

Your own labor Labor force retention Ricky.

Recruiting et cetera.

Cause icon owns its excel at care network.

I would think that you have somewhat of a unique maybe a more boots on the ground view.

Into the site level and we are hearing increasing feedback that the.

Kind of a labor stress at the site level is perhaps still rising kind of consistent with what we hear out of the health care system in general and I wondered if you could comment on that and how that might or might not be affecting the throughput.

Kind of your supply chain and the throughput for trials at the site level.

Yeah.

Yes, it's a really good point.

Youre absolutely right we are.

We're seeing some challenges at the site level.

Particularly in terms of labor.

<unk>.

Labor, we feel we're in a in a better place than most on that front, because we have our <unk> and of course.

They stopped and in most cases by our own people are supported by our own people and we have more of an ability to.

To coordinate and manage that so far.

Finding the <unk> sites are starting to disproportionately Ah perform they already have.

The performance has been even more enhanced and I think part of it is because of the stability of the labor pools that we're able to to provide one or the other.

Opportunities, we believe we have with our home health care.

And DSL occur resources is actually deploying some of that resource to some of these sites that might not be within our network, but obviously need support.

The business opportunity today that we are actively pursuing until we can get some benefit from as well because of the those results. We added as I say in the home health care, obviously, the pace of the time they go to the site.

<unk> saw it and so there is some opportunity there, but it is a challenge I think right across the industry. The sites are under pressure a lot of recruiting.

We and many of our Brethren have been doing is from sort study sorry coordinated steadiness is Mike very good Cri and many cases insider thoughts are under some pressure and that's something that as I said.

Represents a challenge, but also a significant opportunity for Wisconsin.

I appreciate the answers thank you very much.

Thank you.

Now we're going to take our next question.

Please standby.

And the next question comes from the line of <unk> from Barclays. Your line is open. Please ask your question.

Hi, This is Sam on for Luke We just had a question on Covid headwinds in the second half do you have any color there.

I think I think sentiment I would just sort of talk.

<unk> talked about there a moment ago I think most of the headwind on the year over year comparative was always going to be in the first half of the year, you'll see it I mean, it's not going away obviously entirely in the second half of the year, but the most significant tail. We have decline was in Q2, so that would be of an element of that in Q3 Q4, but not to the same extent.

We've seen in Q1 Q2.

Got you sorry for the redundant question.

We have another question on the pricing environment on Rfps.

Could you guys give us any color there as well.

Okay.

Alright.

We see any major changes on the pricing environment as I think I alluded to or spoke to previously.

In terms of.

Pricing from a right point of view customers have been constructive in the conversations we've had with them around increases.

The ability for us to move out.

Rates up.

And.

In an amount that's in line with not just inflation, but with the current market. The current market for our staff and the challenge we have there so.

I think I think I mean.

<unk> discussions are always.

A challenge with our.

Our industry is very competitive.

Sure.

But we don't see any particular.

<unk> or any particular issue that's driving.

More and more of.

More of a challenge in that space at the moment.

It's always competitive continues to be competitive and I would expect it's going to change anytime soon.

That's helpful. Thank you.

Thank you.

We are now going to take our next question.

Please standby.

And the last question comes from the line of that debate from Bank of America.

Open please ask your question.

Hi, good morning, or good afternoon. This is John on for Derek.

On net leverage you've gone from targeting sub three times suggest.

It was previously your aspirational two five times EBITDA, but now you.

Youre there youre targeting that two five times that you continue to pay down the debt.

Now as you continue to make progress in bringing our leverage down.

Where are you in terms of pursuing share repurchases.

And could you talk about your.

M&A pipeline as well on how the market is are you starting to have more inbound discussion done.

Maybe data assets additional site networks.

Sure.

From a share buyback point of view, we really are focused on share buybacks at the moment.

We have very good laser laser focused on paying debt down.

The fed raised interest rates I think it was yesterday.

As a percent we were expecting we modeled in further rate increases and from our point of view with where our share price is at the moment and we're up companies at the moment and what the likely scenarios going.

Going forward on an interest rate basis, we think that is the best use of our capital to put it into paying down the debt and we're very very focused on doing that so.

At the moment.

There's no real sort of buying back shares.

Obviously, as we get down to under three and we haven't.

Brendan often talking about our aspirational target of two and a half as we get into next year.

We will obviously start to think about that will reconsider that and be but probably a bit more opportunistic on that on that basis.

That will obviously lead also to to a review of our M&A pipeline at the moment, we're seeing we might be such good progress on that front, but we are starting to look around the industry and as we go through some of the macro environmental and economic challenges, we think there could be opportunities for us whether they be in the deadline spaces, you mentioned over the <unk> network.

Parts.

Our business, we are very focused in the clinical business. We want to continue that we do see some opportunities.

Around helping us to get patients into clinical trials faster and better and so those are that's.

That's the area we're.

Looking at data data data analytics side and the networks around sides. Those are the areas, we would consider but we're not ready quite ready to pull the trigger on those at the moment, we starting to scan the environment, we're looking at what opportunities may.

May be available in the next 12 months or so but at the moment of the cycle.

I realize the focus is on paying the dividend.

Great. Thank you and.

<unk> you guys talked about.

On supply chain, our supply chain challenges surrounding kits surprise.

Any ongoing issues there.

No it does.

It pretty much resolved now John .

Did have some challenges as I alluded to as I mentioned on the previous call. We've worked hard to get our ducks in a row on that front and we are now in a much better place on that front. So.

That situation is resolved.

Okay, great to hear thank you.

Thank you.

There are no further questions and would like to hand, the conference over to Steve Cutler for closing remarks.

Okay.

Thanks, operator, thank you everyone for joining the call today, we are pleased to have delivered another quarter of solid financial and operational performance and extend our gratitude to over 40000 employees across the globe for their continued.

Continued contributions to our mission of accelerating development of our customers' drugs and devices. Thank you all have a good day.

This concludes today's conference call. This concludes today's call connect have a nice day.

The conference will begin shortly.

So raise your hand during Q&A you can dial one one.

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Q2 2022 ICON PLC Earnings Call

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